Silicon Valley Bank’s Failure Is Now Everyone’s Problem

If it gets bailed out, will every bank be too big to fail?

GIF of a disappearing dollar bill
Illustration by Matt Chase / The Atlantic

Whispers about insolvency. A bank run. A desperate attempt to raise funds. A bank failure. Market gyrations. Concerns about financial contagion.

History is repeating itself. Today, California regulators shut down Silicon Valley Bank, a lender aimed at start-ups, technology firms, and wealthy individuals. The Federal Deposit Insurance Corporation stepped in as the bank’s receiver. Account holders with less than $250,000 in savings will have full access to their funds as of Monday, the FDIC said. Account holders with more than that—the overwhelming majority of entities banking with SVB, according to the bank itself—will have to wait and see.

This is a debacle, one that will reverberate throughout the Bay Area and the tech ecosystem. In the near term, the biggest risk is that start-ups doing bread-and-butter banking with SVB might not be able to make payroll in the coming days and weeks, forcing them to miss paychecks or even announce furloughs or layoffs. In the medium term, the risk is that companies holding cash in other, smaller banks might worry about their stability, withdraw funds, and spread financial contagion.

In the long term, the danger is that the government might end up bailing SVB out, proving that all banks are too big to fail in the American system.

In the past few days, SVB came to experience a classic It’s a Wonderful Lifetype bank run. On Wednesday, the bank’s publicly traded parent company announced that it had sold some securities at a loss and was trying to raise cash by selling its own shares. This stoked fears that the bank did not have enough cash to cover withdrawals, leading depositor companies to pull their funds, which then led to a solvency crisis.

The underlying problem was a straightforward lack of diversification, as Bloomberg’s Matt Levine has noted. SVB’s clientele is heavily concentrated in the tech industry, which boomed during the pandemic. That led to a dramatic increase in SVB’s books: The bank went from having $60 billion in deposits in 2020 to more than $200 billion in 2022. Normally, banks take such deposits and lend them out, charging borrowers different interest rates depending on their creditworthiness. But relatively few firms and individuals were seeking such bank loans in the Bay Area at the time, because the whole ecosystem was so flush with cash.

SVB parked the money in perfectly safe government-issued or government-backed long-term securities, as Telis Demos of The Wall Street Journal explained today—so safe, it seems, that the firm failed to hedge against the risk that those bonds might lose value as interest rates went up. Which is exactly what happened. This meant that if SVB had to sell the bonds to use the cash to cover deposit outflows, it would have to sell them at a loss. Which is exactly what happened. That would not be a problem, unless a large share of SVB’s account holders decided to withdraw their funds. Which is exactly what happened.

To be clear, this was mismanagement on SVB’s part. “What happens if interest rates go up?” is not an arcane question for a bank to have to answer, nor is “Are we adequately diversified?” But the Federal Reserve’s sharp and decisive interest-rate hikes played a role in a few ways: They reduced the value of the bonds on SVB’s books and spurred depositors to withdraw money from the institution as the tech industry cooled. The venture capitalists who made SVB such a big deal in the first place also played a role by egging start-ups to pull their funds from the institution.

“SVB’s condition deteriorated so quickly that it couldn’t last just five more hours today so that the FDIC could take it over on the weekend for an orderly resolution,” Dennis Kelleher, the CEO of the nonprofit Better Markets, said in a statement. “Its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable.”

This bank failure is proving to be a spectacular mess. In many cases, a large share of a bank’s account holders are fully covered by FDIC deposit insurance, because relatively few people keep more than $250,000 in their accounts. But most of SVB’s account holders had more than $250,000 on hand, given that the bank caters to start-ups, venture capitalists, and Silicon Valley elites. Thus, thousands of people have their money frozen while the government figures out whether and how to merge the bank with another institution, sell off SVB’s assets to get people their money back, or grant protection to deposits of more than $250,000.

Why not just let the capitalists eat the losses? Because a lot of account holders are companies that are trying to keep the lights on and ensure that their employees get paid, and because of the risk of financial contagion. “I’m working with my [California] colleagues to address the Silicon Valley Bank crisis,” Representative Eric Swalwell, whose district covers much of the East Bay, wrote on Twitter. “We must make sure all deposits exceeding the FDIC $250k limit are honored. Banking is about confidence. If depositors lose confidence [in] the safety of their deposits over 250k then we are in trouble.”

That might be the right call in this case. But it might also be the decision that the government ends up making in all cases where a bank needs a bailout and cannot find a buyer; the taxpayer will forever be called upon to make losses public while profits stay private. The financial system is much better capitalized than it was in 2007, yet the collapse of a bank such as SVB still seems like too much chaos for the financial system to handle and for the real economy to bear.

This is Silicon Valley Bank’s fault. And now it’s everybody’s problem.